INDIAN INVESTMENTS IN LATIN AMERICA AND CARIBBEAN: TRENDS AND PROSPECTS

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1 EXPORT-IMPORT BANK OF INDIA WORKING PAPER NO. 75 INDIAN INVESTMENTS IN LATIN AMERICA AND CARIBBEAN: TRENDS AND PROSPECTS EXIM Bank s Working Paper Series is an attempt to disseminate the findings of research studies carried out in the Bank. The results of research studies can interest exporters, policy makers, industrialists, export promotion agencies as well as researchers. However, views expressed do not necessarily reflect those of the Bank. While reasonable care has been taken to ensure authenticity of information and data, EXIM Bank accepts no responsibility for authenticity, accuracy or completeness of such items. March

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3 CONTENTS Page No. List of Tables 5 List of Figures 7 Executive Summary 9 1. Macroeconomic Overview of the Latin America and Caribbean Region Investment Scenario in the LAC Countries Indian Investments in the LAC Region Investment Opportunities in Select LAC Countries Potential for Indian Investments in the LAC Countries Activities of the in the LAC Region 52 Project Team: Mr. David Sinate, Chief General Manager Dr. Viswanath Jandhyala, Chief Manager Mr. Akshay Dutta, Deputy Manager 3

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5 LIST OF TABLES Table No. Title Page No. 1 OFDI from India to Select LAC Countries (Value in US$ million) 12 2 Priority Sectors for Investments in Select LAC Countries Macroeconomic Snapshot of the LAC Region Rank of the LAC Countries in World Bank s Doing Business Survey Country Wise FDI in the LAC Countries OFDI from India to Select LAC Countries (Value in US$ million) Priority Sectors for Investment in Brazil Priority Sectors for Investment in The Bahamas Priority Sectors for Investment in Panama Priority Sectors for Investment in Mexico Priority Sectors for Investment in Chile Priority Sectors for Investment in Guyana Priority Sectors for Investment in Peru Priority Sectors for Investment in Venezuela Priority Sectors for Investment in Colombia Priority Sectors for Investment in Uruguay Top Destinations in LAC Attracting Investments in Communications and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Automotive and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Alternative/ Renewable Energy and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Metals and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Business Services and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Coal, Oil and Natural Gas and its Share in India s Global Capital Investments Top Destinations Attracting Investments in Financial Services and its Share in India s Global Capital Investments Top Destinations in LAC Attracting Investments in Food and Tobacco and its Share in India s Global Capital Investments List of Operative LOCs extended to Countries in LAC (as on March 31, 2018) 53 5

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7 LIST OF FIGURES Figure No. Title Page No. 1 GDP Growth (at Constant Prices) 9 2 Trends in FDI in the Latin America and Caribbean Region: (US$ billion) 10 3 India s OFDI to the Latin America and Caribbean Region GDP Growth (at Constant Prices) LAC s International Trade (US$ trillion) FDI Inflows to the LAC region and the World Trend in FDI in the Latin America and Caribbean Region: (US$ billion) Top Sectors Attracting FDI in the LAC Countries Evolution of Sectoral FDI Inflows, 2007 vs Top Investing Countries in the LAC Countries (US$ billion) India s OFDI to the Latin America and Caribbean Region India s OFDI to the LAC region in and : Sector Wise Share India s OFDI to British Virgin Islands: Sector Wise Share India s OFDI to Cayman Islands: Sector Wise Share India s OFDI to Panama: Sector Wise Share India s OFDI to Brazil: Sector Wise Share India s OFDI to The Bahamas: Sector Wise Share India s OFDI to Mexico: Sector Wise Share India s OFDI to Chile: Sector Wise Share India s OFDI to Guyana: Sector Wise Share India s OFDI to Colombia: Sector Wise Share India s OFDI to Peru: Sector Wise Share India s OFDI to Venezuela: Sector Wise Share 36 7

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9 EXECUTIVE SUMMARY The Latin America and Caribbean (LAC) region, a grouping of 46 countries, is home to around million people with a combined GDP of US$ 4,948.8 billion. This region has made significant economic progress in the last few decades. The region s GDP per capita (in PPP terms) increased more than threefolds from US$ 4,565 in 1980 to US$ 15,649 in The LAC region has a young, educated and skilled workforce, and is considered a top investment destination due to its growing industrial and manufacturing strength, and continuous improvements in the ease of doing business parameters. It is also endowed with rich reserves of agricultural and natural resources like oil, silver, gold, copper, coal, bauxite, lithium and nickel, besides others. Strong democratic structures, robust institutional mechanisms, efficiently managed macroeconomic systems are the highlights of the evolution of the economies of LAC which opened their doors to globalisation from 1980s onwards. GDP Growth Rate The combined GDP of Latin America and Caribbean region has more than doubled from US$ 2.2 trillion in 2000 to US$ 4.9 trillion in The LAC economy experienced robust growth in the years preceding the global financial crisis. In 2005, the GDP growth was seen at 4.9%, followed by growth of 5.6% and 5.9% in 2006 and 2007, respectively. The growth rate plummeted to -1.8% in 2009, in the aftermath of the global financial crisis. The post crisis recovery has been at a lower level than before; owing to the global economic downturn as well as fall in commodity prices since mid The economy of the LAC region is, however, showing signs of pickup in recent years. Even though the economy of LAC as a region witnessed a contraction in growth rate in 2016 (-0.9%), the IMF has forecasted the growth to pick up to 1.2% in 2017 and further to around 2% in 2018; on account of rebound in commodity prices and global demand (Figure 1). International Trade Over the past decade LAC s total trade (exports plus imports) has witnessed an overall increasing trend from US$ 1.5 trillion in 2007 to US$ 1.7 trillion in Figure 1: GDP Growth (at Constant Prices) % Change f 2018f LAC World Source: IMF World Economic Outlook, October 2017 Note: f- forecast 9

10 2017. This has been interspersed with a fall in trade in 2009, reflecting the period of global financial crisis, followed by a pickup in its international trade averaging around US$ 2.2 trillion during the period 2011 to 2014, and thereafter a period of relative slowdown from 2015 onwards, in line with moderating global trade. LAC s share in total world trade stood at 5.6% in 2016 with share in global exports being 5.6% and the share in global imports being 5.7%. There are five major economic blocs in LAC region- MERCOSUR, Pacific Alliance, CARICOM, CAN, and SICA. Doing Business in the LAC Region According to the World Bank s Doing Business report of 2017, the region has carried out a total of 398 reforms in the last 15 years. Colombia implemented most reforms, and it was followed closely by Mexico and Jamaica. Now, starting a business in the LAC region takes 38 days, compared to 78 days 15 years ago. In 2017, the report identified Mexico, with a rank of 49, as the best country in the region conducive to investment followed by Peru (Rank 58), Colombia (Rank 59), Costa Rica (Rank 61) and Jamaica (Rank 70). The region performs best in areas of getting electricity and getting credit. While, the global average for getting connected to electricity is 92 days for a new business, in the LAC region the average is far lower at 66 days. However, the region requires improvement in certain areas like paying taxes, registering property etc. Given the region s enormous natural resources, educated workforce, and stable economy- many of the world s largest MNCs, including Indian origin MNCs have already invested in the LAC region. Investment Scenario in the LAC Region Owing to opening up of the economies of LAC and the gradual disinvestment in the public corporations, FDI started flowing in a big way in the region. During the early 1990s, the FDI inflows averaged at around US$ 20 billion per year. It increased significantly to average around US$ 70 billion per annum during the turn of the century. The FDI inflows in to the LAC region have grown by 22% to reach US$ 142 billion in 2016 from US$ 117 billion in 2007, and are projected to be around US$ 130 billion in The FDI inflows to the region, however, peaked in 2011, when they stood at US$ 194 billion (Figure 2). The region has witnessed a moderation in FDI inflows in last few years due to Figure 2: Trends in FDI in the Latin America and Caribbean Region: (US$ billion) US$ billion p Sources: UNCTAD World Investment Database and Reports 10

11 a slowdown in economic activity, weak commodity prices and higher exchange rate volatility. The region has absorbed cumulative investments of US$ 1.5 trillion during the period 2007 to 2016, and therefore, remains an important destination for global investments flows. In terms of capital inflows 1 Mexico was the largest recipient of the investment inflows in the LAC region in It absorbed nearly 40% of the total capital investment inflows during the year. Mexico was followed by Brazil, which absorbed 15% of the total capital investment inflows. Other major capital investment recipients in LAC were- Peru (7% of the total capital investment inflows), Uruguay (6%), and Chile (6%). With regards to sectors attracting largest investments in the LAC region, communications remained the biggest capital investment attracting sector with a share of 14.4% in the total capital investment inflows. It was followed by alternative and renewable energy (12.2%), metals (9.6%), coal, oil and natural gas (6.9%), and paper, printing and packaging (6.7%). With the end of the commodity price boom, investments have shifted from extractive industries like metals and oils to renewable energies and telecommunication During the period 2007 to 2017, the US has emerged as the biggest sources of investments in the LAC region, cumulatively. The FDIs from US amounted to US$ billion, which is a little over one-fifth of total FDI inflows in the LAC region. The US is followed by countries like Spain (with FDIs of US$ billion), Germany (US$ 64.5 billion), among others. The top 10 investors are dominated by developed countries, with recent emergence of Asian countries like China, which is now the 9 th largest investor in the region, with cumulative investments worth US$ 46.7 billion and a share of 4%; and India which is now the 22 nd largest investor in the region with cumulative investments of around US$ 8.4 billion and a share of 1%. Indian Investments in LAC Region Even though India and the LAC region are geographically and culturally apart from each other, in recent years, both the economies of LAC countries and India have recognised the growing influence of each other in the world economy, and the mutual benefits that could be derived from partnering with one another. Figure 3: India s OFDI to the Latin America and Caribbean Region US$ million (April to November) Source: RBI database on monthly OFDI from India and Exim Bank Analysis 1 Capital Investments data are sourced from fdimarkets.com. FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency. Capital Investments are considered as a proxy for FDI in this analysis. 11

12 The Indian Government realises that there is a huge trade potential in the markets of the Latin America and Caribbean region. The Ministry of Commerce and Industry, Government of India, had launched Focus: LAC programme in November Under the programme, India has signed Preferential Trade Agreements (PTA) with MERCOSUR and another PTA with Chile. India has also been granted the observer status in the New Pacific Alliance. India s partnership with LAC is in the growing stage. During the period April 1996 to March 2011, India s OFDI to LAC region, cumulatively stood at US$ 6.3 billion, which accounted for 4.7% of the totals OFDIs originating from India during the period. Indian OFDI, which stood at US$ 3.8 billion in , grew by 21% to reach US$ 4.6 billion, in However, in the recent years Indian OFDIs towards LAC region have moderated (Figure 3). The sectoral composition of these investments have been tilted towards agriculture & mining sector. In the year , agriculture and mining constituted 51% of total OFDI from India in the LAC countries, which increased further to a substantial share of 78.2% in The Indian OFDIs to the LAC region have seen a falling trend in past few years, mainly led by a fall in OFDI to British Virgin Islands and Cayman Islands. These are the largest destinations for Indian investments in LAC region (Table 1). During the period April 2011 to November 2017, the British Virgin Island attracted 45.9% of Indian investments. This is followed by Cayman Island, which absorbed 32.9% of Indian investments. Panama (13.8%), Bermuda (3.4%), and Brazil (1.5%) were other major destinations. Table 1: OFDI from India to Select LAC Countries (Value in US$ million) Country British Virgin Island (April to November) Apl to November Cayman Island Panama Bermuda Brazil The Bahamas Chile Mexico Colombia Guyana Peru Uruguay Venezuela Others LAC Total % of total FDI outflows 12.4% 10.6% 12.6% 3.7% 5.1% 3.7% 3.3% 6.6% Source: RBI database on monthly OFDI from India and Exim Bank Analysis

13 Indian Investments in Select LAC Countries British Virgin Islands Of the total OFDI flows from India to the LAC region during the period April 2011 to November 2017, British Virgin Islands attracted almost 46% of the OFDI, accounting for the largest share among the LAC countries. During April 2011 to November 2017, India has invested US$ 6.9 billion in the British Virgin Islands. Indian investments were concentrated towards the manufacturing, and restaurants and hotels, but now financial and business services are absorbing majority of Indian investments. Cayman Islands During the period April 2011 to November 2017, India invested US$ 4.9 billion in Cayman Islands. India s OFDI to Cayman Islands peaked in with a total OFDI of US$ 1.4 billion. Indian investments in Cayman Islands have been concentrated in agriculture and mining sector. Cayman Islands ranks 2 nd among the Latin American and Caribbean countries, in terms of attracting OFDI from India. Panama During the period April 2011 to November 2017, the cumulative Indian FDI in joint ventures and wholly owned subsidiaries including equity, loan and guarantee issued, in Panama stood at US$ 2.1 billion. The highest sector to receive FDI from India in Panama has been the manufacturing sector followed by transportation, storage and communication services, and agriculture and mining. Brazil During the period April 2011 to November 2017, India has cumulatively invested US$ million in Brazil. It is the 5 th largest investment destination in LAC for India. India s OFDI in Brazil is concentrated towards manufacturing sector. In the manufacturing sector, the pharmaceutical industry stands out. Indian companies have been able to cater to the requirements of the growing elderly population in Brazil, which includes an increased demand for lowcost medicine and healthcare. The Bahamas The total cumulative OFDI from India to the Bahamas during the period April 2011 to November 2017 stood at US$ 163 million. The investments have been concentrated in the construction sector with some investments getting diversified in the manufacturing sector in last few years. The construction sector has been the only prominent OFDI recipient from India in the Bahamas. Mexico During the period April 2011 to November 2017, India has invested US$ 48.5 million in Mexico. Indian investments have concentrated towards the manufacturing sector. Mexico s strategic location helps Indian companies access both the US as well as the South American markets. Manufacturing sector has attracted the highest FDI from India in the past few years, followed by marginal investments in the financial, insurance, real estate and business services sectors. Chile During the period April 2011 to November 2017, India has invested US$ 56.6 million in Chile. Many Indian companies have recently entered the Chilean market, through acquisition of Chilean companies or through joint ventures/collaborations. OFDI from India to Chile has featured prominently in the manufacturing sector. Investments in the other sectors have been relatively small. Guyana India s approved direct investments in joint ventures and wholly owned subsidiaries (FDI outflow) in Guyana during the period April 2011 to November 2017 amounted to US$ 17.6 million. Agriculture and mining has essentially been the major sector to receive FDI from India. 13

14 Colombia During the period from April 2011 to November 2017, India has invested US$ 24.5 million in Colombia. Colombia has seen a recent surge in investments from India in the agriculture and mining sector, however, it has been very limited in the sector of manufacturing. Peru During the period April 2011 to November 2017, the cumulative Indian FDI in joint ventures and wholly owned subsidiaries including equity, loan and guarantee issued, in Peru stood at US$ 16.7 million. Peru is one of the leading mining countries of the world, and India s FDI in mining sector in Peru has remained noteworthy, despite the decline over the past few years. Manufacturing sector has been the highlight over the past 4 years, although investments have been low post 2014, reasons for which could be attributed to the global economic slowdown. Venezuela During the period April 2011 to November 2017, the cumulative Indian FDI in joint ventures and wholly owned subsidiaries including equity, loan and guarantee issued, in Venezuela stood at US$ 12.2 million. The manufacturing sector has been the only major sector attracting FDI from India Investment Opportunities in Select LAC Countries The investment promotion agencies of the countries in the LAC region have put forward their priority sectors, taking into account the capability of each country. Considering the natural resources and other technological advancements that the region possesses, majority of the countries have identified the following areas as potential investment sectors viz. agribusiness, power and renewable energy, IT enabled services, manufacturing, tourism and mining, among others. The top LAC countries which have received India s FDI are considered (Table 2). Country Brazil The Bahamas Mexico Chile Guyana Peru Venezuela Colombia Uruguay Panama Priority Sectors Table 2: Priority Sectors for Investments in Select LAC Countries Oil and Gas, Automotive Industry, Renewable Energy, Infrastructure and Innovation and Technology, and Agribusiness and Life Sciences Touristic Resorts, Information and Data Processing Services, High-technology services, Agro-industries, Food Processing, Banking and other Financial services, Pharmaceutical Manufacturing, and Offshore Medical Centers Aerospace, Processed Foods, Automotive Industry, Medical Devices and Pharmaceutical, Household Appliances and Electronics, Renewable Energy, ITeS and Software Food Industry, Global Services, Mining, Energy, Tourism, and Business Opportunities Agriculture and Agro-processing, Light Manufacturing, Services, Energy, Tourism, Forestry, Information and Communication Technology, and Mining Agribusiness, Electricity, Textiles and Apparel, Mining, Hydrocarbons, Real Estate, Transport Infrastructure, and Tourism Information and Communication Technology Services, Tourism, Hydrocarbons, Mining and Metallurgy, and Foods Agribusiness, Manufacturing, Software and IT Services, BPOs, Private Equity Funds, Hotel and Infrastructure and Tourism Energy, Infrastructure, Logistics, Agribusiness, and Global Services Logistics, Agro-Industry, Financial Services, and Tourism Source: Investment Promotion Agencies of Respective Countries 14

15 Potential for Indian Investments in LAC Countries Indian investments to the LAC region peaked during the year , when they reached 12.6% of India s global OFDI. During the last three years, there has been a declining trend in India s OFDI to LAC. During the year , the share of the LAC region in India s OFDI moderated to 3.7%. The region offers immense opportunities for Indian entities. In order to explore Indian investment potential in the LAC region, each of the top attractive sectors of the LAC region are analysed to check whether India holds a potential for investment. The following methodology is undertaken in the regard: 1. Identifying top countries that have attracted largest investments in the top investment attracting sectors in the region. 2. Finding out whether India has made significant investments in those sectors in LAC. 3. Analysing whether India can contribute or invest in the identified sectors, keeping in view India s investment capabilities and inclinations, by looking at the sector s share in India s global capital investments. Essentially, the sectors like communications, automotive, alternative/ renewable energy, metals, business services, financial services, food and tobacco, and hydrocarbons, among others, present opportunities for the Indian investors for enhancing investments in the LAC region. Activities of (Exim Bank) in the LAC region The importance of the LAC region in India s trade and investments configuration can be gauged from the fact that the Government of India has initiated several measures to enhance bilateral trade relations with the LAC countries. One of the most important steps has been the Focus LAC Programme, with which Exim Bank is closely associated. The countries in the LAC region have always been a focus region for Exim Bank, and thus a critical component of the Bank s strategy to promote and support two-way trade and investment. As a partner institution to promote economic development in the LAC region, the commitment towards building relationships with the region is reflected in the various activities and programmes which Exim Bank has set in place. Exim Bank plays a critical role and is committed towards supporting GOI s initiatives in promoting strategic partnerships with countries in different regions and especially those in the LAC region. Exim Bank has a representative office in Washington D.C., USA, which plays a key role in facilitating economic cooperation with the LAC region, and is closely associated with several of the Bank s initiatives. The representative office interfaces with institutions such as Inter-American Development Bank (IDB), Washington D.C.; Banco Nacional de Desenvolvimento Economico e Social (BNDES), Corporacion Andina De Fomento (CAF), Venezuela; Banco de Inversion Y Comercio Exterior S.A. (BICE), Argentina; Central American Bank for Economic Integration (CABEI/ BCIE), Honduras; Caribbean Association of Industry & Commerce, Trinidad & Tobago; Banco Mercantil (Banco Universal) C.A., Venezuela, as well as Indian missions in the region. Lines of Credit To enhance bilateral trade and investment relations, Exim Bank extends Lines of Credit (LOCs) to overseas governments (or to agencies nominated by them) or to financial institutions overseas for encouraging imports from India on deferred payment terms. In the LAC region, Lines of Credit (LOCs) have been extended by Exim India to governments, regional banks and national banks in the region. Exim Bank has currently 22 operative Lines of Credit (LOCs) amounting US$ million covering 6 countries in the LAC region. Project Exports Under its Project Exports assistance, Exim Bank extends both funded and non-funded facilities for overseas turnkey projects, civil construction, supplies 15

16 as well as technical and consultancy service contracts across various sectors of the economy. During the year , a project amounting to ` crore (approximately US$ 8.64 million), in Suriname, was executed by Indian exporters with the support of Exim Bank. Such projects executed by assistance received from Exim Bank, have contributed to the host country s developmental endeavours and have assisted in narrowing developmental gaps in such countries. Buyer s Credit under National Export Insurance Account (NEIA) Buyer s Credit under National Export Insurance Account (BC-NEIA) aims at providing further impetus to project exports from India on medium or long term basis, especially in the infrastructure sector. Under this programme, Exim Bank facilitates project exports from India by way of extending credit facility to overseas sovereign governments and governmentowned entities for import of goods and services from India on deferred credit terms. Indian exporters can obtain payment of eligible value from Exim Bank, without recourse to them, against negotiation of shipping documents. As on March 01, 2018, positive lists of 86 countries (including 25 LAC countries) have been identified by ECGC for which Indian exporters can avail Buyer s Credit under NEIA. Overseas Investment Finance Further, Exim Bank supports Indian companies in their endeavour to globalise their operations, through overseas joint ventures (JVs) and wholly owned subsidiaries (WOS). These ventures serve to promote value addition, as also contribute to capacity building and capacity creation in host countries. Currently, Exim Bank through its overseas investment finance programme has supported 23 such ventures, set up by Indian companies in 7 countries in LAC namely, Brazil, British Virgin Islands, Cayman Islands, Mexico, Chile, Guatemala, Panama, with an aggregate sanction amount of `3,530 crore (approximately US$ million). To Sum Up India and the Latin America & Caribbean region together are home to around 1.9 billion people, with a combined GDP of US$ 7 trillion, in Both India and the LAC region have emerged as major growth engines of the world, and with the growing challenges in the world economy, diversification of trade partners and access to new markets has become a priority for both the sides. With the increasing diversification of India s global trade towards other developing countries, the LAC region has emerged as an important economic partner for India. The LAC region has a young, educated and skilled workforce, and is considered a top investment destination due to its growing industrial and manufacturing strength, and continuous improvements in the ease of doing business parameters. It is also endowed with rich reserves of agricultural and natural resources like oil, silver, gold, copper, coal, bauxite, lithium and nickel, besides others, which provides immense potential in the sectors of agribusiness and food processing; and hydrocarbons. India, as a fast growing developing economy is experiencing burgeoning food and energy needs, and therefore, deeper ties with partners in the LAC region could prove to be mutually beneficial. A number of Indian companies in various sectors have established their strong presence in the LAC region. With a view to facilitate and further enhance bilateral trade and commercial relations with countries in the LAC region, India has put in place important policy measures as also institutional frameworks to create an enabling trade and business environment. Major policy initiatives and institutional frameworks include, among others, Focus LAC Programme, IBSA Initiative, India-LAC Partnership Conclaves, Preferential Trade Agreements (PTAs) with MERCOSUR and Chile, etc. India has been granted Observer status in the emerging grouping, the New Pacific Alliance. Indian OFDI towards the LAC region, which has been in the form of joint ventures and wholly-owned 16

17 subsidiaries and has amounted to almost US$ 14.9 billion during the period April 2011 to November Indian OFDI has been majorly concentrated in few LAC countries like the British Virgin Islands, Cayman Islands, Brazil, Mexico, Panama, Bermuda, the Bahamas, Chile, Peru, and Colombia. Indian investors could also seek out other potential countries in the region to diversify their investment portfolios. Sectors like communications, automotive, alternative/ renewable energy, metals, business services, financial services, food and tobacco, and hydrocarbons, among others, present opportunities for the Indian investors for enhancing investments in LAC region. 17

18 1. MACROECONOMIC OVERVIEW OF THE LATIN AMERICA AND CARIBBEAN REGION The Latin America and Caribbean (LAC) region, a grouping of 46 countries 2, is home to around million people with a combined GDP of US$ 4,948.8 billion 3. This region has made significant economic progress in the last few decades. The region s GDP per capita (in PPP terms) increased more than threefold from US$ 4,565 in 1980 to US$ 15,649 in The LAC region has a young, educated and skilled workforce, and is considered a top investment destination due to its growing industrial and manufacturing strength, and continuous improvements in the ease of doing business parameters. It is also endowed with rich reserves of agricultural and natural resources like oil, silver, gold, copper, coal, bauxite, lithium and nickel, besides others. Strong democratic structures, robust institutional mechanisms, efficiently managed macroeconomic systems are the highlights of the evolution of the economies of LAC which opened their doors to globalisation from 1980s onwards. Macroeconomic snapshot of the region as a whole, over the period from 2008 to 2016, is presented in Table Key Aspects of the Economic Scenario in the Latin American and Caribbean Region GDP Growth Rate- Recovery around the Corner The combined GDP of the Latin America and Caribbean region has more than doubled from US$ 2.2 trillion in 2000 to US$ 4.9 trillion in The LAC economy experienced robust growth in the years preceding the global financial crisis. In 2005, the GDP growth was seen at 4.9%, followed by growth of 5.6% and 5.9% in 2006 and 2007, respectively. The growth rate plummeted to -1.8% in 2009, in the aftermath of the global financial crisis. The post crisis Source: IMF, World Economic Outlook, October 2017, World Bank Database, ITC Geneva Trademap, ITC Geneva Note: f- forecast - Not Available 2 As per ECLAC, the member states are- Antigua and Barbuda, Argentina, Bahamas, Barbados, Belize, Bolivia (Plurinational State of), Brazil, Chile, Colombia, Costa Rica, Cuba, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, Venezuela (Bolivarian Republic of). Associate members are- Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Curaçao, Guadeloupe, Martinique, Montserrat, Puerto Rico, Sint Maarten, Turks and Caicos Islands, and United States Virgin Islands. 3 IMF World Economic Outlook, IMF World Economic Outlook, 2017 Table 1.1: Macroeconomic Snapshot of the LAC region Items f 2018 f Nominal GDP (US$ bn) 4, , , , , , , , , , ,764.9 Real GDP Growth (%) GDP per capita, current prices (US$) 13, , , , , , , , , , ,087.8 Inflation, Average Consumer Prices (%) Population (mn) Merchandise Exports (US$ mn) , , , , Merchandise Imports (US$ mn) , , , , , Current Account Balance, (US$ bn) Current Account Balance (% of GDP)

19 Indian Investments in Latin America and Caribbean: Trends and Prospects Illustrative Map of the Latin America and Caribbean Region Source: United Nations, Geospatial Information Section Note: Map not to scale and is only for depiction purpose. recovery has been at a lower level than before, owing to the global economic downturn as well as fall in commodity prices since mid The economy of the LAC region is, however, showing signs of pickup in recent years. Even though the economy of LAC as a region witnessed a contraction in growth rate in 2016 (-0.9%), the IMF has forecasted the growth to pick up to 1.2% in 2017 and further to around 2% in 2018; on account of rebound in commodity prices and global demand (Figure 1.1). 19

20 Figure 1.1: GDP Growth (at Constant Prices) Source: IMF World Economic Outlook, October 2017 Note: f- forecast Figure 1.2: LAC s International Trade (US$ trillion) US$ trillion Source: ITC Geneva and Exim Bank Analysis EXPORTS IMPORTS TOTAL TRADE TRADE DEFICIT LAC s International Trade Over the past decade the LAC s total trade (exports plus imports) has witnessed an overall increasing trend from US$ 1.5 trillion in 2007 to US$ 1.7 trillion in This has been interspersed with a fall in trade in 2009, reflecting the period of global financial crisies, and thereafter a period of relative slowdown from 2015 onwards, in line with moderating global trade (Figure 1.2). During the period , the LAC s trade remained almost stable at US$ 2.2 trillion. In 2016, US was the biggest exporting destination for the LAC region, with over 45% of its exports directed towards US. It was followed by China (9% of total exports), Netherlands (2.3%) and Canada (2.2%). 20

21 Vehicles other than railway or tramway was the largest exporting item from the LAC region in 2016, with a share of 12% in its total exports. This was followed by mineral fuels and oils (10% of total exports), electrical machinery and equipments (9.6%), machinery and mechanical appliances (8.7%), and ores, slag and ash (5.7%). On the other hand, electrical machinery and equipment was the biggest importing item for the LAC region, with a share of 15.4% in imports, followed closely by machinery and mechanical appliances (14.7%), transport vehicles (9.4%), mineral fuels and oils (9%), and plastics and its articles (5%). The LAC region s share in total world trade stood at 5.6% in 2016, with share in global exports being 5.6% and the share in global imports being 5.7%. There are five major economic blocs in LAC region- MERCOSUR, Pacific Alliance, CAN, SICA and CARICOM. MERCOSUR: The Southern Common Market consisting of five countries in southern Latin America: Argentina, Brazil, Paraguay, Uruguay and Venezuela. The region encompasses approximately 72% of the territory of South America, a combined population of 293 million and GDP of US$ 2.7 trillion in Pacific Alliance: is a Latin American trade bloc formed in 2011 among Chile, Colombia, Mexico, and Peru. Together the four countries have a combined population of about 226 million and GDP of US$ 1.8 trillion in India is an observer member of the Pacific Alliance. CAN-The Andean Community consisting of four countries: Bolivia, Colombia, Ecuador and Peru. The combined GDP stands at US$ 610 billion in 2016, with a population of 108 million. SICA: The Central American Integration System consisting of seven countries: Belize, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama. The combined GDP of these countries stood at around US$ 245 billion, with a population of around 47 million, in CARICOM- the Caribbean Community consisting of 20 countries. The member states are: Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, Saint Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. Its associate members are: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, and Turks and Caicos Islands. It is home to around 16 million people and GDP of US$ 75 billion in Investment Scenario in the LAC Region Owing to opening up of the economies of the LAC region and the gradual disinvestment in the public corporations, FDI started flowing in a big way in the region. During the early 1990s the FDI inflows averaged at around US$ 20 billion per year. It increased significantly to average around US$ 70 billion per annum during the turn of the century. According to the UNCTAD World Investment Report of 2017, a modest increase is projected in global FDI inflows in This expected recovery reflects accelerating economic growth in all major regions, strong performance of stock markets and a rebound in world trade volume. However, the FDI inflows in the LAC region are expected to fall by 9.2% to reach US$ 130 billion in 2017, even as the world investment prospects improve (Figure 1.3). This is because of moderating growth in the region coupled with weak commodity prices (commodity exports are the region s principle exports). The South American region is facing a moderation in the inflows of FDI because of slowdown in economic growth, weak commodity prices and higher currency volatility. In Central America, the deceleration of gross fixed capital formation and export trade volumes has led to a decreasing FDI inflows. In the Caribbean (except for the financial centres), there is a fall in the value of green-field investments, Dominican Republic, however, experienced a boost in investment owing to its mining sector, tourism and real estate inflows 5. 5 UNCTAD, World Investment Report,

22 Figure 1.3: FDI Inflow to the LAC region and the World US$ billion p LAC World Source: UNCTAD World Investment Report 2017 Note: p- projections 1.2 Doing Business in the LAC Region The economies of the LAC region, which adopted import substituting industrialisation policy from 1950s onwards, opened up in 1980s and have since become important growth engines for the world. Many economies are now considered to be top investment destinations. For instances the emergence of Mexico as the hub for automotive and electronic industries, and Brazil s growing strength in manufacturing industries. According to the World Bank s Doing Business report of 2017, the region has carried out a total of 398 reforms in the last 15 years. Colombia implemented most reforms, and it was followed closely by Mexico and Jamaica. Now, starting a business in the LAC region takes 38 days, compared to 78 days 15 years ago. In 2017, the report identified Mexico, with a rank of 49, as the best country in the region conducive to investment followed by Peru (Rank 58), Colombia (Rank 59), Costa Rica (Rank 61) and Jamaica (Rank 70) (Table 1.2). The region performs best in areas of getting electricity and getting credit. While, the global average for getting connected to electricity is 92 days for a new business, in LAC region the average is far lower at 66 days. However, the region requires improvement in certain areas like paying taxes, registering property etc. Given the region s enormous natural resources, educated workforce, and stable economy- many of the world s largest MNCs, including Indian origin MNCs have already invested in the LAC region. 22

23 Table 1.2: Rank of the LAC Countries in World Bank s Doing Business Survey Economy Global Ranking LAC Ranking Mexico 49 1 Peru 58 2 Colombia 59 3 Costa Rica 61 4 Puerto Rico 64 5 Jamaica 70 6 El Salvador 73 7 Panama 79 8 St. Lucia 91 9 Uruguay Guatemala Dominica Dominican Republic Trinidad and Tobago Antigua and Barbuda Paraguay Source: World Bank s Doing Business Survey Economy Global Ranking LAC Ranking Honduras Argentina Ecuador Bahamas, The Belize Brazil Guyana St. Vincent and the Grenadines Nicaragua Barbados St. Kitts and Nevis Grenada Bolivia Suriname Haiti Venezuela, RB Note: The World Bank s Doing Business measures aspects of regulations that enable or prevent private sector businesses from starting, operating and expanding. These regulations are measured using 11 indicator sets: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and labour market regulation. 6 6 World Bank. (2017). Doing Business. 23

24 2. INVESTMENT SCENARIO IN THE LAC COUNTRIES The FDI inflows in to the LAC region have grown by 22% to reach US$ 142 billion in 2016 from US$ 117 billion in 2007, and are projected at US$ 130 billion in The FDI inflows to the region, however, peaked in 2011, when they stood at US$ 194 billion (Figure 2.1). The region has witnessed a moderation in FDI inflows in last few years due to a slowdown in economic activity, weak commodity prices and higher exchange rate volatility. The region has absorbed cumulative investments of US$ 1.5 trillion during the period 2007 to 2016, and therefore, remains an important destination for global investments flows. In terms of capital inflows 7, Mexico was the largest recipient of the investment inflows in the LAC region in It absorbed nearly 40% of the total capital investment inflows during the year. Mexico was followed by Brazil, which absorbed 15% of the total capital investment inflows. Other major capital investment recipients in LAC were- Peru (7% of the total capital investment inflows), Uruguay (6%), and Chile (6%). With regards to sectors attracting largest investments in the LAC region, communications remained the biggest capital investment attracting sector with a share of 14.4% in the total capital investment inflows. It was followed by alternative and renewable energy (12.2%), metals (9.6%), coal, oil and natural gas (6.9%), and paper, printing and packaging (6.7%). 2.1 FDI Inflows in the LAC region: Top Countries Table 2.1 presents the country wise breakup of total FDI inflows in the LAC region during the period Mexico and Brazil were the top two foreign investment attracting countries in the region. Together they absorbed more than 50% of the FDI inflows during the period Similarly, the top five economies namely, Mexico, Brazil, Chile, Figure 2.1: Trend in FDI in the Latin America and Caribbean Region: (US$ bn) US$ Billion p Sources: Source: UNCTAD World Investment Database and Reports 7 Capital Investments data sourced from fdimarkets.com. FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency. Capital Investments are considered as proxy for FDI in this analysis. 24

25 Table 2.1: Country Wise FDI in LAC Countries Capex S. No Destination Country Share (US$ bn) 1 Mexico % 2 Brazil % 3 Chile % 4 Argentina % 5 Peru % 6 Colombia % 7 Nicaragua % 8 Panama % 9 Venezuela % 10 Uruguay % 11 Dominican Republic % 12 Costa Rica % 13 Bolivia % 14 Cuba % 15 Ecuador % 16 Guatemala % 17 Honduras % 18 El Salvador % 19 Jamaica % 20 Trinidad & Tobago % 21 Others % Total Sources: fdimarkets.com; Data Ranging from January 2007 to December 2017 Note: FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency. Argentina and Peru, together attracted around three quarters of the FDI inflows in the LAC region during the same period. 2.2 FDI Inflows in the LAC region- Top Sectors During the period , the sectors that attracted highest FDI inflows were communications (13.1% of total FDI inflows), followed by automotive sector (12.5%), metals (12.3%); alternate/ renewable energy (10.2%), coal, oil and gas (10.1%). Business services, transportation, and financial services are some other big sectors attracting investments in the LAC region (Figure 2.2). 2.3 Evolution of Top FDI Attracting Sectors in the LAC region: What Changed Between 2007 and 2017 Over the past ten years the economy of the LAC region has evolved. During the year 2007, the top sector attracting FDI was automobile (15% of total FDI inflows), followed by metals (14%), coal, oil and natural gas (12%), and in 2017 the biggest sectors were communications (14%), followed by alternate and renewable energy (12%), and automobiles (11%) (Figure 2.3). With the end of the commodity price boom, investments have shifted from extractive industries like metals and oils to renewable energies and telecommunication. 2.4 FDI: Top Investors in the LAC region During the period 2007 to 2017, the US has emerged as the biggest sources of investments in the LAC region, cumulatively. The FDIs from the US amounted to US$ billion, which is a little over one-fifth of total FDI inflows in the LAC region. The US is followed by countries like Spain (with FDIs of US$ billion), Germany (US$ 64.5 billion), among others (Figure 2.4). The top 10 investors are dominated by developed countries, with recent emergence of Asian countries like China, which is now the 9 th largest investor in the region, with cumulative investments worth US$ 46.7 billion and a share of 4%; and India which is now the 22 nd largest investor in the region with cumulative investments of around US$ 8.4 billion and a share of 1%. 25

26 Figure 2.2: Top Sectors Attracting FDI in the LAC Countries ( ) Investments (US$ billion) Sources: fdimarkets.com and Exim Bank Analysis; Data Ranging from January 2007 to December 2017 Note: FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency. 26

27 Figure 2.3: Evolution of Sectoral FDI Inflows, 2007 vs % 15% 10% 11% 12% 14% 12% 7% 7% 6% 2% 7% 5% 5% 5% 5% 4% 2% 6% 4% Sources: fdimarkets.com and Exim Bank Analysis Share in 2007 Share in 2017 Note: FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency Figure 2.4: Top Investing Countries in the LAC Countries (US$ billion) US$ billion Sources: fdimarkets.com and Exim Bank Analysis; Data Ranging from January 2007 to December 2017 Note: FDI Markets tracks cross-border investment in a new physical project or expansion of an existing investment which creates new jobs and capital investment. This data differs from official data on FDI flows as company can raise capital locally, phase their investment over a period of time, and can channel their investment through different countries for tax efficiency 27

28 3. INDIAN INVESTMENTS IN THE LAC REGION Even though India and the LAC region are geographically and culturally apart from each other, in recent years, both the economies of the LAC region and India have recognised the growing influence of each other in the world economy, and the mutual benefits that could be derived from partnering with one another. The Indian Government realises that there is a huge trade potential in the markets of Latin America and Caribbean region. The Ministry of Commerce and Industry, Government of India, had launched the Focus: LAC programme in November This programme has been reviewed from time to time and has been extended till March Under the programme, India has signed Preferential Trade Agreements (PTA) with MERCOSUR and another PTA with Chile. India has also been granted the observer status in the New Pacific Alliance. India s partnership with the LAC is in the growing stage. During the period April 1996 to March 2011, India s OFDI to the LAC region, cumulatively stood at US$ 6.3 billion, which accounted for 4.7% of the totals OFDIs originating from India during the same period. Indian OFDI, which stood at US$ 3.8 billion in , grew by 21% to reach US$ 4.6 billion, in However, in the recent years Indian OFDIs towards the LAC region have moderated (Figure 3.1). 3.1 Evolution of India s OFDI to the LAC region The sectoral composition of these investments have been tilted towards agriculture & mining sector. During the year , agriculture and mining constituted 51% of total OFDI from India in the LAC countries, which increased further to a substantial share of 78.2% in (Figure 3.2). This could essentially be on account of the LAC region being endowed with ample reserves of various agricultural and natural resources and due to the fact that partnership between LAC and India in this sector, could help India meet its burgeoning food and energy needs of its growing developing economy. As a result, significant Indian investments have been made in the mining and hydrocarbon sector. 3.2 India s OFDI to the LAC region: Trends The Indian OFDIs to the LAC region have seen a falling trend in past few years, mainly led by a fall in OFDI to British Virgin Islands and Cayman Islands. These are the largest destinations for Indian investments in the LAC region (Table 3.1). During the period April 2011 Figure 3.1: India s OFDI to the Latin America and Caribbean Region US$ million (April to November) Source: RBI database on monthly OFDI from India and Exim Bank Analysis 28

29 Figure 3.2: India s OFDI to the LAC region in and : Sector Wise Share Source: RBI database on monthly OFDI from India and Exim Bank Analysis Table: 3.1: OFDI from India to Select LAC Countries (Value in US$ million) Country British Virgin Islands (April to November) Apl to November Cayman Islands Panama Bermuda Brazil The Bahamas Chile Mexico Colombia Guyana Peru Uruguay Venezuela Others LAC % of total FDI 12.4% 10.6% 12.6% 3.7% 5.1% 3.7% 3.3% 6.6% outflows Source: RBI database on monthly OFDI from India and Exim Bank Analysis 29